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Dramatic stock plunge could reinforce investors' fear of getting back into the market

May 07, 2010|By Walter Hamilton, Los Angeles Times

Just when you thought it was safe to get back into the stock market.

The stock market's heart-pounding plunge Thursday — with the Dow Jones industrial average briefly plummeting almost 1,000 points before closing down nearly 350 — was a jarring reminder that volatility can return in an instant.

A bad day that began with continuing fallout from the Greek credit crisis morphed into an ominous free fall that stirred memories of the 1987 stock market crash and the darkest days of the global financial collapse in early 2009.

And though much of the drop appeared to stem from a glitch that kicked in preset computerized trading, the dramatic plunge is nonetheless likely to reinforce a fear of the market among individual investors, experts said.

Many people who suffered punishing losses during the financial crisis have largely shunned stock mutual funds over the last two years in favor of seemingly safer bond funds.

Experts question whether that's a wise long-term strategy, especially given the skimpy yields on bonds and bank certificates of deposit. But the market spasm will do nothing to erase that thinking.

"If you're watching on the sidelines, the news of a big drop isn't going to push you back into the market," said Mark Wilson, a financial planner at the Tarbox Group in Newport Beach.

"The reason they're on the sideline is because they're afraid, and this isn't a day that will make people feel more confident," he said.

The wariness of individual investors was having a significant effect on the market, said Phil Roth, an analyst at New York brokerage Miller Tabak & Co.

The relative dearth of such long-term holders meant that stocks were increasingly being batted back and forth among hedge funds and other fast-trading professionals. That limited the market's long-term prospects and left share prices vulnerable to whiplash-like moves.

"The market's biggest problem during the advance was there were no investors, only traders," Roth said. "And today's drop shows you what can happen when traders try to sell in a vacuum, basically."

The Dow dropped 347.80 points, or 3.2%, to close at 10,520.32. At its worst moment during the trading day, the blue-chip indicator plummeted 998.50 points.

The Dow has slumped 6.1% from its high less than two weeks ago, and is at its lowest point in two months.

The Standard & Poor's 500 index fell 37.75 points, or 3.2%, to 1,128.15. The Nasdaq composite skidded 82.65 points, or 3.4%, to 2,319.64. Many European indexes fell 1% to 3%.

One key index that measures expected market volatility soared 32% Thursday, and has nearly doubled in the past two weeks.

The best advice for most investors? Experts still say: Don't sell in a panic.

Many Wall Street specialists have been expecting a pullback after the almost uninterrupted advance in stocks since their lows in March 2009.

The U.S. economy is showing increasing signs of emerging from recession, and a clear recovery could propel share prices upward. And over the longer term, measly bond yields could push investors toward stocks.

"The initial reaction when hit with news like this is to want to panic and want to sell," said Victoria Collins, senior managing director at First Foundation Advisors in Irvine. "That's the worst possible thing to do."

For stouthearted investors who had been looking for a chance to add to their stock holdings, the current sell-off could present a buying opportunity, some experts said. By its very nature, buying on a dip means jumping in when others are rushing out.

"We were buying today for client portfolios," Wilson said. "This doesn't seem like a long-term start to another bad market, another 2008 scenario. We're happy to be buying at these lower levels."

But be careful. Don't feel compelled to buy in, and don't do so if you weren't already planning to, experts said.

Roth doubts that the market will launch into another lengthy advance, meaning investors will have other chances to buy in.

"This is not the opportunity," he said. "This is an opportunity."

walter.hamilton@latimes.com

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